Pacific Basin Shipping Ltd

HKEX:2343

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to today's Pacific Basin 2022 Annual Results Announcement Call. I'm pleased to present Chief Executive Officer, Mr. Martin Fruergaard. [Operator Instructions].

Mr. Fruergaard, you may now begin.

[Martin Fruergaard, CEO]

Thank you. Welcome, ladies and gentlemen, and thank you for attending Pacific Basin's 2022 Annual Results Earnings Call. My name is Martin Fruergaard. I'm CEO of Pacific Basin, and I'm joined by our CFO, Peter Schulz.

Please turn to Slide 3. I'm pleased to report that in 2022, we achieved record underlying profit of $715 million and EBITDA of $935 million. Our second-best net profit of $702 million also produced an excellent return on equity of 38%. Thanks to these strong cash flows, we were able to end the year with net cash of $65.3 million, and we have available committed liquidity of $615 million as at 31st December, 2022.

Given the excellent performance of the company in 2022 and our confidence in the longer-term fundamentals of the industry, the Board has recommended a final basic dividend of HKD 0.17 per share consistent with our dividend policy of paying out at least 50% of net profits. Additionally, a final special dividend totaling HKD 0.09 per share will also be paid.

In total, the proposed final basic dividend and the proposed final special dividend amounts to HKD 0.26 per share when combined with the HKD 0.52 per share interim dividend distributed in August 2022, this represents 75% of our net profit for the full year. Total 2022 interim and proposed annual dividends to be paid out to the shareholders is equal to $525 million. We continue to be committed to distributing excess cash to shareholders through dividends.

Please turn to Slide 4. In 2022, the dry bulk freight market saw an increase in average market freight rates during the first half of the year due to high demand for minor bulk commodities. This was further supported by port-related congestion and limited new supply. However, the second half saw a decrease in freight rates due to a variety of factors including rising inflation and interest rates contributing to slower global growth. Also the Ukrainian conflict restricting Black Sea grain exports and lower construction activity and restrictive COVID policies impacting the Chinese economy.

Our Handysize and Supramax achieved net daily TCE earnings of $23,430 and $28,120, respectively, resulting in the total contribution of $747 million before overheads. 2023 freight rates have started lower than those of 2022 as demand continues to be impacted by lower global economic activity and the typical seasonal weakest seen around Lunar New Year. Nevertheless, we are optimistic that rates have bottomed and sentiment has improved as China resumes its reopening from COVID and the East Coast South American grain season begins.

Please turn to Slide 5. Global dry bulk loading volumes experienced a 2% year-on-year growth, mainly driven by an increase in the demand for minor bulks and coal. Minor bulk loading rose 6% in 2022 with bauxite, forest product and salt being the primary contributors. The second half of the year saw a 3% uptick in minor bulk loadings, with the main contributors being forest product, agribulk and bauxite.

On the other hand, grain loadings were adversely impacted by unfavorable weather conditions affecting crop yields in most major exporting countries as well as limited grain export from the Black Sea due to the Ukrainian conflict. Coal loadings rose 2% compared to the previous year as countries in Europe and notably India source coal from non-Russian areas such as the United States, Australia, Colombia and South Africa.

Iron ore loading decreased 1% due to seasonal weather in the first half of the year, limiting cargo availability in Brazil and Australia as well as reduced demand in China as domestic property construction slowed, and economic growth was negatively impacted by continued COVID mitigation controls.

Please turn to Slide 6. We delivered record daily TCE earnings with our Handysize rates in 2022, up 15%, while Supramax rates were down 4% on average compared to the same period last year. We have covered 95% and 100% of our Handysize and Supermax vessel days in first quarter 2023 at $13.460 on and 13,680 per day net respectively. As mentioned in our third quarter trading update in October last year, we have been focused on optimizing our short-term cover to maximize earnings over what is commonly a softer market during the Northern Hemisphere winter and also the Lunar New Year periods.

We have covered 46% and 68% of our healthy size and Supramax vessel space for 2023 at $12,490 and $13,310 per day net respectively. Please note that our Supermax forward cover estimates exclude the scrubber benefit, which is currently about $2,160 per day across our Supermax vessels.

Please turn to Slide 7. For 2022, both our Handysize and our Supermax delivered an exceptional performance, and we outperformed the indices by $5,210 per day and $7,080 per day, respectively. Our performance continues to benefit from our diverse cargo and customer base and a close customer interaction facilitated by our extensive global office network.

It is worth noting that scrubber fitted to our core Supramax vessels contributed $2,510 per day to our performance in 2022. Handysize and Supramax vessels have outperformed the indices over the last -- over the last 5 and 6 quarters, respectively. Our operating activity generated $56 million equal to an average margin of $2,840 net per day over 19,830 operating days.

Although the margins fluctuated over the period, they stayed at historically high levels, and our operating activity provides us an ongoing opportunity to leverage Pacific Basin's commercial and operational expertise as well as our global proximity to our customers to generate additional income for the business. In the second half of 2022, our operating performance and margins were negatively impacted by the high cost of short-term time charters, especially for our Supramax vessels.

Please turn to Slide 8. Our Handysize owned vessel costs increased mainly due to higher costs related to crew repatriation and other pandemic-related manning expenses. These cost increases moderated and went into reverse as China abandoned its zero-COVID policy. We have continued our efforts to diversify our seafarer recruitment and are actively working to increase the proportion of Indian Seafarers. This has also helped in reducing costs associated with repatriation over the period. Higher depreciation over the period relates to the reversal of vessel impairment of $152 million at the end of 2021.

Please turn to Slide 9. Our Supramax owned vessel experienced decreased depreciation and finance costs for both our Handysize and Supermax vessels continue to benefit from the decreased depth on our balance sheet. This has been particularly evident in light of the current rise in interest rates. The long-term chartered vessel daily costs for our eighth time chartered-in Supermax ships increased to $16,590 per day due to the strong market conditions, which have resulted in higher chartered cost overall, 3 out of the 8 long-term chartered vessels have scrubbers.

Despite the increase in cost on a small number of long-term charter vessels, our blended Supramax costs remain controlled, and our own owned vessels decreased costs by $340 per day. I will now hand over to Peter, who will present the financials, and I will be back afterwards with outlook and strategic summaries.

[Peter Schulz, CFO]

Thank you very much, Martin. Good afternoon, ladies and gentlemen. If you turn to Slide 11, we will set out our P&L in summary. As you can see, our record daily TCE earnings, we generated our best result in both underlying profit and EBITDA despite higher Handysize owned cost and higher Handysize and Supramax chartered cost as Martin has explained.

Our G&A has increased mainly due to higher discretionary remuneration provisions, given our result for the period. Below underlying profit, our net profit was further improved by gains on vessel disposals, although offset by our hedging portfolio and incentive fees paid to bondholders for the early conversion of our convertible bond.

If you please turn to Slide number 12. Our operating cash inflow for the year was $874 million, and that's inclusive of all long- and short-term charter-hire payments. This compares with the $813 million for the full year 2021. We had $74 million in proceeds from the sale of 7 smaller Handysize vessels, which were sold and delivered in the period. CapEx spending remains well controlled, and for 2022 totaled $85 million of which we paid $38.1 million for 2 second-hand Ultramaxs, and around $47 million for dry dockings and Ballast Water Treatment Systems.

We expect CapEx expenditure for 2023 to be approximately $60 million to $65 million, predominantly relating to dry dockings and Ballast Water Treatment System and excluding any vessel purchases. We paid $72 million in incentivized conversion payments and various repurchases of our convertible bond, reducing the outstanding convertible bond to $31.4 million. The $716 million in dividend payments relate to the 2021 final annual dividend of $367.7 million paid in May 2022 and the interim dividend of $385 million -- sorry, $348.5 million paid in August 2022.

Now please turn to Slide 13. Despite significant shareholder distribution, we have continued to delever our balance sheets, and we are today $65.3 million net cash positive while our committed liquidity is $615 million. The conversion offer and open market repurchase of our convertible bond was an important factor in this deleveraging exercise, which is now largely complete.

Our goal going forward is to ensure that we maintain our strong available liquidity position for potential growth investments while still providing returns to our shareholders through dividends. As a testament to this strategy, we expect to pay 75% of 2022 profits through dividend, as Martin mentioned.

I will now hand you back to Martin for his outlook and strategy.

[Martin Fruergaard, CEO]

Thank you, Peter. Clarksons forecast a recovery in the market for 2023, with grains and coal set to be the major drivers. They anticipate a stronger grain season in East Coast South America, which is expected to begin in the next couple of weeks with additional support from Canada and Australia, despite a lower harvest of Ukrainian grains.

Food and energy security is expected to result in an increase in tonne-miles as both commodities are sourced from further distances. It is believed that dry bulk freight rates have bottomed and that we will soon see an improvement in Chinese demand as workers return from Lunar New Year holidays, factories increased production and China continues with its post-COVID recovery.

In the long term, we see upside demand from; first of all, China increasing its domestic and global trade with a focus on economic growth through property, infrastructure and domestic construction. We see significant global infrastructure investments going forward, much of it driven by the green transition, also continuous growth in emerging markets such as India and ASEAN region. And finally, geopolitical instability increased food and energy and security, which is likely to further drive tonne-miles demand for grain and coal.

Please turn to Slide 16. We have continued to see that the long established relationship between dry bulk earnings and new building contracting has been broken. High new building prices and long delivery time of about 3 years has continued to discourage any significant new ship ordering, but uncertainty around decarbonization rules, technology limitations and reduced life of older technology ships have contributed to 2022 new building ordering being down 54% compared to 2021, and dry bulk order book now at 7.2% of the total fleet.

While balance sheets have been repaired, we are seeing more companies like ourselves acting on short-term weaknesses in asset prices to acquire high-quality assets in the secondhand market. We continue to think that new building orders will remain limited as designed for zero-emission-capable vessels have -- are developed over time.

Please turn to Slide 17. Despite 2022, having even less scrapping than 2021, the global dry bulk fleet grew only 3% net during the year compared to 2.9% in 2021, mainly due to slowing new building deliveries. Vessel speeds have reduced in connection with lower TCE earnings and high bunker prices.

And while capacity through increased vessel speeds, it's possible we expect current and future decarbonisation rules to continue to limit vessel speeds over time. COVID-related inefficiencies around the world, particularly in China, have begun to be alleviated, and we have seen congestion in most major loading areas come back to more normalized levels.

We expect IMO 2023 regulations and the introduction of the European Union Emission Trading Systems from 2024, we'll start forcing slower speed and higher scrapping from 2024 at the earliest. Clarksons has forecast scrapping of 1.6% and 2.2% of the fleet in 2023 and 2024, respectively. These supply constraints and limited scope for speeding up the global fleet provides structural long-term support for the dry bulk market.

Please turn to Slide 19. Our strategy continues to remain unchanged. And at our core, we will remain asset-heavy, continue to acquire selectively and in a disciplined way -- quality secondhand ships. We will continue to gradually sell our smaller, older ships when the time is right. We have a world-class ship management team, and we are committed to keeping this function in-house with the ambition to further improve our safety and environmental performance, our cost competitiveness and our service quality and reliability for our customers.

We will maintain our high level of service to our customers while ensuring our crew are healthy and safe and our vessel continue to operate safely and efficiently. We repeat again that we will not contract new buildings with zero-emission-capable ships are available and commercially viable in our segments. And we will keep our balance sheet strong while contributing excess cash to shareholders.

Please turn to Slide 20. We remain committed to grow our Ultramax fleet and renewing our Handysize fleet. And during 2022, we acquired one Ultramax vessel and one Supramax vessel, which we expect to be delivered within February 2023 and one Ultramax vessel expected to be delivered in March 2023.

We currently own 115 Handysize and Supramax ships and including chartered ships, we currently have approximately 240 ships on the water. In addition, we had 8 vessels we purchased, which we expect to be delivered during the first half of 2023, which includes 6 Ultramax one Supramax and one Handysize. This return to growth is utilizing our strong balance sheet to make countercyclical investments, which we feel fit our long-term strategy to continue to grow our fleet.

During 2022, Asset prices approach historical highs, which allow us to sell some of our smaller, older heavy size ships, thereby crystallizing value and further optimizing our fleet to meet tightening environmental regulations. In the year, we sold and delivered 7 Handysize vessels while also selling one Ultramax vessel, we will continue to look for opportunities to divest these smaller, older Handysize vessels depending on market conditions.

Please turn to Slide 21. We will continue to trade our ships efficiently for high laden-to-ballast utilization that will constantly seek, assess and implement energy-efficient operating measures including looking for collaboration solutions with our customers, tonnage providers, ports and other stakeholders. As many of you are aware, the IMO adopted global regulations which came into effect from January 2023. We aspire for our ships to achieve an AER rating of C or better, but we will continue to prioritize EEOI with high laden-to-ballast utilization while managing our AER to ensure CII compliance.

We are preparing ourselves for shipping inclusion in the European Union Emissions Trading System, which is scheduled for January 2024. In addition to our initiatives to reduce the carbon intensity and on our existing ships, we are collaborating and making preparations to achieve the longer-term goal of complete decarbonization by transition to entirely new zero-emission-capable ships and fuels, which are soon to become commercially available.

During the year, we committed to cooperate with Nihon Shipyard and Mitsui in investigating alternative green fuels and the availability and to develop new zero-emission vessels designs and potentially invest in related bunkering infrastructure. Through our investigation, we have concluded a green methanol is currently the most optimal fuel for the first generation of zero-emission vessels, and we are now collaborating with our partners to develop an efficient design for what we expect will be our first dual-fuel Ultramax ship able to run on either methanol or fuel oil.

We should be ready to contract our first zero-emission vessel, but delivery well ahead of our originally 2030 target, and we believe that our example will help accelerate the transition to zero-emission shipping in our dry bulk sector.

Please turn to Slide 22. 2022 was another exceptional year, which has allowed us to further improve our balance sheet through a significant reduction in our debt while also returning capital to shareholders. We believe the underlying demand and supply fundamentals of the minor bulk market will be supportive for rates that will allow us to generate steadier and more sustainable earnings over the long term.

We continue to position the company for a decapitalization future through initiatives to reduce the carbon intensity of our existing ships while we maintain our focus to achieve our long-term goal of complete decarbonization. Our efforts in digitalization, fleet optimization, sustainability and collaborating on the development of zero-emission vessels and associated green fuels are always we continue to adapt to even more sustainable business strategy.

This ends my update, but before going to Q&A, I would like to thank our CFO, Peter Schulz, who will be leaving as in March 2023. We are incredibly grateful for Peter's unwavering commitment and dedication to our company over the years. His expertise and leadership has been instrumental in our success and growth. We wish him all the best and success in his future endeavors. Thank you very much, Peter.

And as always, I'd like to take the opportunity to thank all our loyal and talented Pacific Basin seafarers and shore-based staff as it is not without -- actually it is not without your commitment and professionalism that we can deliver these results and continue to improve our safety performance. Ladies and gentlemen, I will now hand over to the operator, who will open the line for any questions you may have.

Operator, over to you. Thank you.

[Operator]

[Operator Instructions] Our first question is from Andrew Lee.

[Andrew Lee, Jefferies]

Okay. I've got a few questions, right? The first question I have is on the outlook. Is the view that in the short term, there's going to be headwinds because in the press release, right, if there's a long-term prospects of dry bulk shipping despite any short-term headwinds. So are we seeing that rates have bottomed? Are we seeing that there's going to be headwinds in the short term, right? That's my first question.

Second question I have is -- you mentioned that crew costs actually increased, right? Could you give us a little bit of guidance in terms of how much it increased by? And also, you mentioned that the costs are now reducing. So looking into this year, how much should we take off the cost, right, when you break it down into Handysize Supramax which is on the cost side?

Third question I have is on your forward coverage ratio, right? If we're thinking that rates have actually bottomed, would it make more sense to actually reduce the forward coverage ratio? So you play more of the -- little bit of the spot market and then you lock it in when rates are higher, so that your earnings will be stronger.

And then final question always on the dividend. Last time, you mentioned what the minimum cash level was if you were going to pay a special dividend. Could you just give us a little bit of update in terms of how those numbers changed? Okay. I'll ask the rest of the questions next time. That's all I have to now.

[Martin Fruergaard, CEO]

Yes. If I take the first -- try the first 3 and hopefully, Peter will take the last. So thank you, Andrew, for the questions. I think on the outlook, if it's bottomed or I could say headwind -- I think it's clearly bottomed. You definitely see, and that's quite normal for first quarter that you see market coming down and then it starts going up in February.

And the market is actually acting exactly as we had expected. But that being said, then the rates are definitely improving, but they are still at a low level. And I think when we -- if we mention a headwind, it is probably a little bit the discussion about how quickly will we see recovery in the market. If we look at the derivatives, they are actually increasing quite sharply.

And the rates for the second half on the derivative market is up $14,000 plus. So that is quite -- that indicates at least that there is some momentum in the market. The thing is that the South American grain season is just starting now. And I would also say, Lunar New Year has just finished and China is coming back and starting up. So we are quite positive, and we definitely believe that market has bottomed out, but exactly how long it will take to really see -- how quickly the market will go up, that remains to be seen.

But the last 3 days, it's definitely seen a positive trend. So we are actually quite positive about that. Cost on crew, I think we said it earlier in other meetings, it was mainly on the OpEx side, it was mainly on our Handysize ships also because they were mainly crewed with our Chinese colleagues, officers and crew. And during COVID, it was very, very difficult.

And just as an example, we had last year a flight ticket from Singapore to Shanghai. I think it was one way, costing $11,000 on tourist class for crew member. That has disappeared now. And of course, that will bring down the rates. If we can bring it totally down to the same level as the previous years, maybe not. I think we'll have to see how it goes. There has been some inflation also on the cost side, but I would expect us to be able to bring it down, but we just started the year. So let's see.

Reduced cover, yes, clearly, if the market goes above $14,000 of our cover level, then yes, it would probably be smarter to have less cover and can be in the spot market. But I think historically, we have always had some cover. And I think it's fair to say -- remember on the Supramax, it doesn't include the scrubber.

And also remember, we are usually quite good at operating and improving our results over the period. And of course, let's see how we do. Lots of our cover is also what we call front haul business. So it's actually contract that brings the ship into the loading area, and then there's an upside because you are in the loading area. So hopefully, there is some improvement to be done. And of course, as always, Andrew, we have to see how the market develop. But I think we're quite happy with what we have at the moment.

Actually, very happy about the cover we had for the first quarter, where we had very good cover coming into the year, and that has been very beneficial. And then, of course, we somehow hope that the cover we have rest of the year, as you say, we shouldn't have done because the market becomes better, but let's see.

[Peter Schulz, CFO]

Yes. Andrew, I think the numbers you're referring to are the available liquidity of preferably over $400 million to $500 million, which I think we always said was quite a big buffer preparing us well for the future. So I think still a long-term goal to have that level of liquidity cushion.

Of course, as we're now entering into more of a growth phase buying more ships as we see long-term value in buying ships. I mean you will have seen the deal for 6 ships that we did in January. There could, of course, be periods where there will be greater requirements on cash, et cetera. We might dip below that for periods of time. But -- and that's quite natural because we don't always fund acquisitions fully in the bank market when we do them. But I think, I mean, as a long-term target, I still think you can think around $400 million as a sort of a good cash buffer for us to have.

[Operator]

Our next question is from John [indiscernible].

[Q –Unidentified Analyst]

Thank you very much for great results and a fantastic dividend. So as investors really appreciate that. A couple for you. Just on – obviously, in the freight rates, fantastic last year, $25,000 a day, roughly speaking. And that was with China actually in lockdowns and so on. Now we’ve got China out of lockdowns and rates have dropped precipitously. Obviously, it’s a slack season, but we’ve actually seen $2,000 a day on Capesize, so that’s very low.

I just wondered how much of that sort of simple high level we saw in ‘21 and ‘22 was down to port controls, COVID controls is sort of tied up shifts. So in other words, we had ships either waiting outside port or import for longer than normal, so that reduced the available capacity. Now that’s gone, all those ships can move around in a normal way and then rates are down. So I don’t know if it’s a contrarian type of view, if there’s any sort of water in that or if it’s just – we’ve had the China pandemic sweep through there and then we’ve had a long Lunar New Year. And now we’re, hopefully, after the raise, maybe the --

[Martin Fruergaard, CEO]

Yes. Yes. Thank you, John, very sort of valid question, and we have also had that discussion. There’s – I think it’s fair to say that the market in ‘21 and ‘22 was driven by demand. And – but of course, also further helped for these exceptional earnings helped by increased congestions and inefficiencies and maybe also the these things happening around the world like Ukraine and so on all these things, of course, helps in a sense that it creates a lot of inefficiencies on the trading pattern. On top of that actually strong demand in market as most countries came out of COVID.

I think it’s important to remember during that time, not much support from China in sort of demand thing. But of course, you can say on the congestion side and probably also a little bit of help from the container market that they had exceptional earnings as well. And of course, that was probably a little bit of spill over to us. So some of all creating 2 years of what is, of course, exceptional earnings.

And you can say now we have returned to more normality. We saw of course, reduced as the world economy came down in speed, we saw reduced demand also for minor bulk during second half, bringing the market down to more normal levels. And I think also, as you mentioned, I think – that today, the congestion is probably – it is actually back to pre-COVID levels. So it’s actually less than it was before that. So there is basically no congestion left.

And of course, that has probably reduced the market a little bit further to it. And we have all been waiting for China to sort of wake up and get going again. And they’re doing that now, but I think it’s probably a little bit too early still to see the result of that. Remember, it’s not long ago, we all spoke about that they will have a major problem opening up with COVID and so on, but it seems they got out of that quite well.

And the feeling we have. And we also see it in China at the moment, we see increased lending. We see increased housing prices, actually, we see increased construction going on in China. We see increased steel prices and iron ore prices. So actually, we see China coming back. And China is, of course, also in the recovery we’re talking about is extremely important.

They are big part of the dry powder market. So of course, we sit and look at China and hope – and also believe actually that they are going now back in a growth mode coming from a lockdown for a long – extended period. So you’re right. And I also think China is part of the recovery we’re going to see going forward.

[Q –Unidentified Analyst]

If you don’t mind, I’ll just ask a couple of other quick questions. One of your numbers there is that the actual cargo carried was down 14% from 79.2% to 68%. So it’s interesting, we had a great year, but cargo actual carrier was down 14%. I just wondered what that was about, whether it’s longer distances or ballasting?

The other question I’ve got for you – just on the – it was great that cover you got in Q1, that was really smart. And I missed the coverage you said you had for the full year, which I won’t mind if you say that again, please. But the other one is that the long-term charges you got in the second half of last year, $16,000 a day. Obviously, now doesn’t look so great.

The whole sort of chartering inside of the business, I just wonder if that’s really necessary because it sort of increases the risks to the business and maybe you’re better off sticking with – just yourself on vessels. I’m just wondering if you could explain sort of risk and rewards of the chartering because obviously, you’ve got to get the chartering timing right, if you charter out at high levels as we see, it can be a rest of the company.

[Martin Fruergaard, CEO]

Yes. If we – what was the first question – the demand there? Yes, it was about the volumes carry volume, I mean the reason for that is – it’s a function of how many ships we have on the water. – the ships are generally full or carrying capacity, right? So the amount of cargo is the amount of ship we have on water. And it so happened when the market peaked in 2021, we had a lot of ships on water, especially Supramaxes in that strong market as the demand was very strong.

So it’s not surprising that in ‘22, there is a slightly lower carriage of volume because we had slightly a few chartered in ships in the portfolio on average.

Yes. And on the cover, John, we had – we said we have for the full year, including first quarter for the full year, 46% on heavy sizes at about $12,500.

And on the Supramaxes for the full year, 68% at $13,100, and that includes basically 100% cover for the first quarter. That’s the cover we have. And remember, again, it’s a lots of it is front haul. These are not optimized, and they do not include the scrubber benefits, which is about $2,160 in the Supermax ships.

Yes, you are, of course, right that we have 8 ships, fairly small fleet 8 ships long-term charters at a little bit at a high rate at the moment, $16,000. Well, the market second half this year is at least on the derivative market is $14,000 on an index under ships that is plus $15,000 on a ship like these. These are better ships plus 3 of them have scrubbers, which again will add something – some money to them.

So yes, there is an exposure to it, but it looks manageable and 8 ship is not a lot, it is always like that when you come from a market that is very good. There will be an overlap of ships that you have taken. And of course, you try to time it right. And here, we have a few ships that is a little bit long. I – we always – and we have less long-term charter now than we have had in the past and probably have more own ship than we ever had.

So maybe a little bit agreeing with you on that part, but it is a part of the dry cargo market and to try to optimize with short and long-term charters. And when you look at our operating business, we have made $56 million this year, and we made $60 million last year. And also when you look at last year, and I hope that will also be this year, we outperformed the indexes – that, of course, by combining these things and taking advantage of the market. So I think it’s actually a good part of our business to do that part. But of course, you have to be careful, for sure.

[Q –Unidentified Analyst]

I’ve got 1 or 2 others, but I don’t give somebody else to – I’ll come back if I will later.

[Operator]

Our next question is from Nick Harbinson.

[Peter Budd, Head, IR & Corporate Communications]

While we find Nick, I'll just take a question from the online. Hucky from Dev bulk asked. If you have any plans for any share buybacks over the next quarters? If so, how would this likely be structured given your 10% buyback mandate?

[Peter Schulz, CFO]

At the moment, we have no plans for any share buybacks. But it's an ongoing discussion with the Board depending on valuation of the stock relative to NAV and these kinds of things, but no concrete plans at the moment.

[Peter Budd, Head, IR & Corporate Communications]

Another question from the online from Nick Scott from Mackenzie Investments. Why did you achieve better cost control on your Supramaxes versus Handysize's in '22?

[Martin Fruergaard, CEO]

Yes. I think the answer is a little bit like I said before, on the Handy's we have -- also more proposal among Chinese crew on these ships. And of course, that was the area where that was hit the hardest by the COVID restrictions where the costs increased the most. And that's, as we also said earlier, we have moved some of the ships with -- to Indian crew.

Also, of course, availability of Chinese crew has been difficult. And now we actually also see that the cost of the Chinese as COVID disappears and COVID restrictions disappears in Japan, we see costs coming down. So the reason is that majority of our Chinese colleagues have been on the Handysize ships.

[Peter Budd, Head, IR & Corporate Communications]

And one more question before we go back to Nick. In terms of the China reopening, what commodities do you expect to benefit the most of the China reopening and which vessel types?

[Martin Fruergaard, CEO]

Yes. I wish I could say minor bulk and the Handysize and the Ultras. But I think the first thing we probably see is because we already see it now that steel prices are increasing, and we see also iron ore commodity price increasing. So that is the Capesize market, which is also -- have been incredibly low. And I think that activity will come up if Australia and Brazil can deliver the volumes. But so that will happen.

Now so I think -- we also think coal also because China has lifted the ban on Australian coal and we start now seeing shipments of coal from Australia to China. And we also hear that in China, they have -- they are starting to use the stockpiles of coal. So it also seems like they are starting increasing consumption of the coal.

And hopefully, there will be more coal import to China. But over time, and as hopefully as we see now, construction starts picking up and so on, it will migrate down to the minor bulk segments, and we do historically a lot of logs into China out of New Zealand.

That has been very quit the last year, and that will, of course, pick up again as soon as construction starts again. So -- but I think in all fairness, I think the Capesize and the bigger ships will probably benefit first. And we also need to see that happen and then slowly thereafter the minor bulk will also come.

[Peter Budd, Head, IR & Corporate Communications]

Deepak from HSBC has 2 questions. The first one going, current spot rates are well below your breakeven. Can you cover on the impact of P&L at these levels and our current FFAs are good signal to the market for second half earnings?

[Peter Schulz, CFO]

Well, yes, the spot market or the index market is below. But remember, our cover, that is not -- remember, we had basically 100% cover for first quarter at $13,000 -- $13,500 on the 2 segments. That is definitely above our peer breakeven. The other question, Peter?

[Peter Budd, Head, IR & Corporate Communications]

And the second question is on Slide 30, you mentioned long-term charters. How many of these are contracted with customers at profitable rates?

[Martin Fruergaard, CEO]

Well, they are -- those long-term ships, they go into the fleet as our own fleet. So they are not -- they're not charted out except the cover that we, of course, mentioned earlier.

[Nick Harbinson, Tantallon Capital]

Could I get any of my question now?

[Peter Budd, Head, IR & Corporate Communications]

Yes, please go ahead.

[Nick Harbinson, Tantallon Capital]

It's really just a question on valuation. I'm sure everyone on the call that's a shareholder is frustrated at how little value the market seems to want to accord to the business. And just a general question, what do you think you gained from being a public listed company?

[Martin Fruergaard, CEO]

It's -- that's not an easy question to answer. We've been listed since and 2004, right?

[Nick Harbinson, Tantallon Capital]

I know -- shareholders for much of that time.

[Martin Fruergaard, CEO]

Yes, yes. And of course, I hope over part of that time, we have produced good shareholder value for our shareholders, right? And especially in the last couple of years, it's been a phenomenal investment to shareholders, right? So we do believe that shipping can -- this is a philosophical discussion.

So I don't think we should spend too much time on it, but shipping can constitute from an investors perspective, an interesting part of a well-diversified portfolio. We are a bellwether of the global economy. We are the ability -- we give investors the ability to play on the cycle, play on assets historically play on China and these things.

I think there are many reasons to invest in companies like ours. Why don't we get full value for it? Sometimes, I guess, we would ask the investors that question as well, we think we should get value for it. I mean Pacific Basin, in particular, we don't just have ships as a tonnage provider. We're not floating real estate. We operate our ships better than the competition with higher TCE rates with a lower cost and bigger scale.

And we also have an operating business completely independent of our owned ships, right? So we add up all of that, there's a significant value in that business. Of course, I think historically, and for a long period of time, shipping was unable to earn a return on equity because of oversupply. And I think that lingers a little bit in people's consciousness.

And that -- it took a long time to work out that supply from the super cycle 10 years ago plus, right? I think now the situation on supply is completely different, whereas 10 years ago, we were staring at a decade of oversupply. There is a possibility now that we're looking at the next decade as a decade of undersupply. So don't rule us out as a good investment for the future.

It might be one of the best you can make now in the beginning of this decade given the order books and given global economy. So I don't want to be a snake oil salesman and try to sell everything here, but I think there are good reasons to invest in shipping.

[Operator]

Our next question is from John [indiscernible].

[Unidentified Analyst]

Another couple from me. Just on the cover, when you talk about say $13,500, is that included in the scrubber benefits or does that come on top? So that's one question. And then on the -- sort of the fleet -- the strategy of renewing the fleet to go to net zero. Just wondered, are we going to see sort of like 3, 4 years from now, very large CapEx, sort of huge fleet renewal of large orders and new buildings?

Or is it going to be sort of a direct feed over the years? Or is it just far too soon to say, given that you're saying methanol like they're seeing, but in fact, that may not be workable. I guess just on a technical point with methanol, I note that is only half the energy density of fuel oil? So I just wondered this ship design, I mean, would it be able to use the fuel tank?

And would you be able to sort of swap feels very readily and the performance of the ship, obviously, will have bigger fuel tanks. So it's more space is used for fuel. So it may perform in an inferior way to a regular ship. Anyway, I mean that's -- so I'm just trying to get a handle on how realistic methanol actually will be given there's no methanol infrastructure.

And if there is going to be some kind of large sort of fleet renewal of you'd just be a sort of really something fairly just a very slow process.

[Peter Schulz, CFO]

Yes. First of all, the question about the -- John, the question about the cover. Again, the cover does not include the scrubber upside -- in the scrubber side to make to $2,000, you had to put that on top of it. And remember, when you look at our cover, it is a lot of front hold. So there's a lot of buyers that brings us into the loading areas where they usually will be an upside on the next leg.

And remember that we normally -- actually outperformed a little bit on these things as we go along as we optimize the operation. The renewing of the fleet, yes, there is an ambition to renew the fleet, if you look, and we have an ambition to grow. I think it's fair to say that if we want to sort of maintain size, we probably have to buy 10 ships a year.

And if we want to grow, we, of course, have to do more than that. And we have an ambition to grow. So -- but if you go back in time, I don't think -- of course, we have become a bigger company now. So of course, the CapEx might be higher, but we have always tried to sort of look at the cycles of the market and try to do the best timing of buying our ships.

So last year, we didn't buy anything really. We sold 7, 8 ships of the older smaller ones. And early this year, we have bought quite a bit. We think we bought 9 ships, again, as we saw asset prices coming down about 20% from the peak of the market in the middle of last year. So we will always do that. In respect to the methanol ships, that has to be new buildings over time.

We have a project in Japan with our partners there. And at the moment, we are looking at the design of the ships and how many and so on, that remains to be seen. I think there's a little bit more work to be done on that part. But it's clearly our ambitions, and we think it's the right thing. We need to decarbonize as an industry and also Pacific Basin has to do that.

So at a certain stage, we need to go into remission ships. And we think methanol is the right plan at the moment. So we are definitely working on that part. But how much and how quickly and so on, let's see. On the technical side of it, no, you cannot have methanol in fuel tanks. You have to have coated tanks to carry methanol. And that's part of the project, of course. And that's -- we are spending quite a bit of time and resources on these things. There's a lot of design things that you want to get right before you go down that way. I hope that replies the questions.

[Unidentified Analyst]

I just got one quick follow-up. Just on when you said front haul and macro. I mean, I hear this used a little bit -- just like some clarification. So let's say front haul will be some grain coming out of South America going to China, that will be front haul. And then because you've got in to say Shanghai, now your ships there. That means that a backhaul cargo that because your ships there, that's handy for somebody who wants to ship out of Shanghai and take that to Thailand or something. Is that the right way of thinking about front haul and backhaul?

[Martin Fruergaard, CEO]

Yes. So you can say our contract cargoes are mainly -- lots of it is voyages that goes from different places in the world down to the main loading areas. So that could be cement from Southeast Asia, from Japan down to Australia. Australia is, of course, a loading area from lots of other commodities or it can be fertilizers going into South America, which is also a loading area for grain. So you can say that some of the contracts we have are voyages actually brings the ships down to the main loading areas.

And normally, you will discount them somewhat because you get down to a bonus area, normally, that's what we mean when we talk about it. I hope that makes sense.

[Unidentified Analyst]

Okay. So front haul will get you to the main loading area like a grain area or coal area. And then the backhaul is coming out of that and going to the --

[Martin Fruergaard, CEO]

I'm also getting confused. It's the other way around.

[Unidentified Analyst]

Okay. Did I say wrong. Okay.

[Operator]

[Operator Instructions] As there are no further questions, we will now begin closing comments. Please go ahead.

[Peter Budd, Head, IR & Corporate Communications]

Yes. I'd like to thank you again for joining us today and for your continued support of Pacific Basin. If you have any further questions, please direct them to our Investor Relations team, who will be happy to answer.

[Martin Fruergaard, CEO]

Thank you very much, and thank you again, Peter.

[Operator]

And this concludes our conference call. Thank you all for attending.